what iPhone device versions to target for physics based games?

Has any experience/advice regarding what versions of iPhone devices to target for a physics/action based game in terms of performance? I am seeing some sluggishness on an iPhone 4, but no problems on an iPhone 5 for example. Are there developers now for example making games that will target only iPhone 4S and above, and NOT target iPhone 4 and below? i.e. not attempt from a performance point of view to make the game snappy on these older versions?

iPhone 4 has the same GPU as in 3GS, only little (~30%) overclocked. However, the screen has 4x more pixels, so it is fragment shader bound. The same is in the first iPad. iPhone 4S and up have better GPUs. That about graphics. But, GPU may consume some time needed for CPU (in one threaded app). Your physics depends, as I assume, on the CPU (which is faster and faster in each model) so you must think how good implementation you have, but I think even on 3GS there should be no problem with it.

You may overcome some slow down behaviors with choosing a smaller resolution on the iPhone4 (and scale it) or use less advanced fragment shading. Also you may use some multithreaded solution (physics and graphics in the own threads).

Any advice on what I should measure to quantify the "snappyness" on different devices. I am actually using Corona SDK and can measure Frame Rate, Memory and Texture Memory. However I'm not sure that if a physics based game is "sluggish" on a device does this necessarily imply this should show up in a reduced frame rate? e.g. maybe dropping below the default 30fps?

I do not know Corona. Yes, your game may be CPU or GPU bound (or both ). You may trying to turn off displaying some objects or making collision with it to see how much processing time each of these parts take (via fps).